Mumbai: Reserve Bank of India (RBI) governor D. Subbarao has a penchant for springing surprises.
He often opts for the unexpected when it comes to monetary policy reviews, recently disappointing those looking for a cut in interest rates, and on Tuesday he cracked a joke that took a bunch of news-hungry reporters and market players for a ride.
Before beginning his speech at one of the country’s largest and most prestigious banking events, the RBI chief said in a serious tone that he had something to announce.
He then declared that he had appointed a committee to debate whether to do away with the cash reserve ratio (CRR)— the portion of deposits that banks are obliged to set aside with the RBI.
Subbarao was referring to a recent public spat between RBI deputy governor K.C. Chakrabarty and Pratip Chaudhuri, chairman of the country’s largest lender, State Bank of India, who has argued for the CRR to be abolished.
Straight-faced delivery: Subbarao’s joke pertained to a recent public spat between RBI deputy governor K.C. Chakrabarty and SBI chairman Pratip Chaudhuri. Photo: PTI
“The members of that committee are Dr Chakrabarty and Pratip Chaudhuri,” Subbarao said, keeping a straight face. “Both of them will be locked up in a room, will not be released until they have reached a conclusion, and the timeframe is that they will not submit their report before my term as governor is over.”
The audience broke into laughter.
However, some reporters at the meeting didn’t immediately get the joke, and sent news alerts on a possible end to CRR that sowed confusion in the bond market. “Though there was no market impact, the market later realized and appreciated the governor’s sense of humour,” said one dealer at a foreign bank in Mumbai.
After his speech, a reporter asked Subbarao if his comment was just a joke. He smiled, and said: “What do you think?” While the reporter took time to comprehend, the market didn’t wait. BSE Ltd’s Bankex, the index of 14 lenders, rose to erase losses. The gauge later dropped after the central bank said the comment was light-hearted and that no such panel exists.
RBI can add or subtract cash from the banking system by adjusting the reserve ratio, making it a key tool of monetary policy. Subbarao’s joke jars with his push to make the central bank more effective and credible by revamping its communication strategy since he became governor four years ago.
“Policymakers need to be doubly sure and think twice about what they say to the media, especially if it’s said in a lighter vein,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore. “In the 24x7 world of the financial markets, even a few seconds of delay in clarification can result in unnecessary price movements, because people will react to news dispatches.”
SBI shares jumped after Subbarao’s comments. It climbed 1.1% as of 1.52pm in Mumbai, while the Bankex Index was up 0.3%. By the end of trading hours, the Bankex rose 0.53% to close at 11,501.58 and SBI shares gained 1.25% to Rs.1,872.25 on BSE.
Subbarao has cut the CRR twice this year, by a combined 125 basis points, to 4.75% to ease cash shortages that threatened to exacerbate a slowdown in growth in Asia’s third-largest economy. One basis point is one-hundredth of a percentage point.
The joke at the bankers’ conclave came after SBI chairman Chaudhuri said on Monday that the CRR hurts the economy.
Subbarao’s comments left investors a bit confused, said Kishor Ostwal, managing director of Mumbai-based equity research provider CNI Research (India) Ltd. Some people still want the ratio scrapped, he said.
The governor’s push to overhaul RBI’s communication includes snappier and more frequent reviews of rate decisions and the introduction of guidance on future direction. The central bank is seeking to reduce the gap with practices abroad.
Subbarao left RBI’s benchmark repurchase rate at 8% for a second meeting in July, seeking to contain an inflation rate that has averaged more than 7% in 2012, the fastest among the world’s largest emerging nations. Most bankers do not expect him to cut rates in RBI’s half-yearly monetary review on 17 September.